27 Jan Risky Behavior in Bankruptcy: Inaccurate Paperwork, But Debtors Still Get Their Debts Discharged

A recent Kansas bankruptcy case, Wieland v. Viles, Adv. No. 09-7006 (Bky.D.Kan. Jan. 19, 2010), involved a married couple who filed a chapter 7 case together. The chapter 7 trustee asked the bankruptcy court to deny them a discharge under section 727 of the bankruptcy code, due to fraudulently transferring property before filing the case, and for including false information in their bankruptcy papers.

The court denied the trustee’s request, but it was a close call in favor of the debtors, who likely could have avoided this brush with disaster by simply paying more attention to the answers supplied in their bankruptcy forms and schedules.

The debtors had purchased a $4,000 riding mower and gifted it to their adult son just prior to filing bankruptcy. They also gave each of their two daughters $1,250 to buy new clothes during a shopping trip.

On the Statement of Financial Affairs, in response to Question 3, which asks for payments to creditors of $600 or more in the 90 days before filing bankruptcy, the debtors listed only three payments. However, it later came to light they had paid $1,290 to Bank of America, $1,076 to Capitol One, $835 to Chase credit cards, $3,596 to Chase Auto Finance, $8,084 to Chase Home Finance, $13,800 to Countrywide Mortgage, $10,959 to First National Bank, $5,767 to Ford Motor Credit, $2,870 to Homecomings Financial, and $1,020 to Kaw Valley Bank.

The debtors also omitted the gifts to their children, along with other pertinent information,from the bankruptcy court paperwork. The debtors included most of this information in later amendments, but in the trustee’s view, the damage had been done by their original incorrect statements.

The debtors testified that they were notcontemplating bankruptcy when they made the gifts of the lawnmower and cash to their children. The court agreed that the gifts were not fraudulent, although it characterized the debtors’ behavior as irresponsible.

The court also rejected the trustee’s claim that the debtors had intentionally misled the court in their incorrect bankruptcy forms. It held that the mistakes were the result of carelessness rather than deceitfulness. The court also noted that some of the information had been given to the debtors’ attorney, but he had simply neglected to include it in the bankruptcy papers.

The debtors prevailed in this case because the court believed their testimony that they had acted imprudently but without bad intent. Cases such as this turn on the court’s perception of the truthfulness of the debtor’s testimony about their conduct and their bankruptcy papers. Obviously, it is preferable to simply file accurate bankruptcy schedules when the case is filed.